Famine-hit North Korea has started to introduce "market reforms", South Korea's central bank has said.

There have been numerous rumours about a gradual move away from a planned economy, but this is the first time that the top watchers of the North Korean economy have confirmed the policy change.

North Korea is said to have scrapped ration coupons and raised the price of rice to more than 50 times its previous level.

The prices of fuel, transport and housing have also risen, the report said.

North Korea has also introduced a big increase in wages to help the now coupon-less workers to pay cash for goods sold at the new rates.

The reforms include freeing up companies to set prices and trade with other firms to obtain raw materials, as well as allowing them to offer productivity incentives.

Historic move

"This is the first step towards adopting a market economy," said the Bank of Korea, which monitors its northern neighbour closely.

It does seem to represent a recognition... of the need to introduce some reforms in these areas in order to increase production

Kenzo Oshima, UN

It said the reforms, which have not been officially announced by North Korea, were introduced in July.

The two Koreas have followed dramatically different paths since the Korean war - still not officially over - led to the partition of the Pacific peninsular in the early 1950s.

The North is ruled by a communist regime, and is one of the world's most secretive countries, branded part of an "axis of evil" by US president George W Bush because of its weapons programme.

South Korea embraced the global economy in the 1960s to turn itself into one of the world's major hi-tech exporters.

Hundreds of thousands of North Koreans are thought to have died in the famine which struck the country in 1996.

Workers get bonuses

In an effort to stimulate productivity, firms have also been given the right to share profits with their workers by awarding them bonuses.

Workers received a 20-fold increase in wages in July.

North Koreans are now paid about 2,000 North Korean won a month, instead of 100-150 won.

There are reports that North Korea's currency has been devalued to 150 won to the US dollar from 2.15 before.

If so, the new salaries are worth about $13 (£8.50) a month.

Since the increase in wages is less than the increase in the price of rice, rationing will continue to exist, but using some form of market mechanisms.

Although North Korea has not officially announced the changes, a senior UN official dealing with emergency relief work has confirmed they have taken place.

"It does seem to represent a recognition on the part of authorities of the need to introduce some reforms in these areas in order to increase production, and to produce some incentive mechanisms," said Kenzo Oshima, UN under-secretary general for humanitarian affairs.

Some observers, though, have raised doubts to what extent the reforms will be able to create a true market economy, and whether North Korean society - living for decades under a Stalinist regime - can cope with the concept of free markets.